IRA Investing: Mid-Term Still Looks Bullish

I don't pretend to be able to forecast the market in the short run, so I don't have an opinion about the next couple of weeks. However, I do attempt to reduce risk by moving to cash if my longer-term or intermediate-term indicators weaken in a meaningful way. And while there has been some softening in these indicators, they remain in bullish territory.

Let's look at an intermediate-term indicator that attempts to forecast market direction over the next two to six months. This is the CBOE Put/Call Ratio, which measures the ratio of put volume to call volume in individual issues.

The five-year chart below shows the S&P 500 in black and a 10-week moving average of the CBOE Put/Call Ratio in red. The green trend lines relate to the three-year moving average of this indicator and its standard deviation. As you can see, this has been a very stable indicator over the last few years, with no discernable trending.

After recording bearish readings in January, this indicator vaulted higher as the market corrected in early March. It went to a very bullish position and has backed off only slightly, currently giving a bullish reading. It would be very unusual for a significant correction to begin while this indicator is at this level, but additional market strength or even a sideways consolidation certainly could change things.

S&P 500 vs. CBOE PUT/CALL

Click here for larger image.

Source: TheAstuteInvestor.com

But let's not try to forecast the indicators. It is hard enough to simply interpret them as they give current readings. Currently, this indicator is rated bullish, and my other two intermediate-term indicators are split: One is very bullish and one is neutral.

Because my long-term indicators remain bullish, my target cash position for my IRA remains at a low 4%. My actual cash position as of May 4 is 8.4% due to a late-week sale that wasn't matched by a purchase, not a stance on the market.

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At the time of publication, Moore was long American Dental, Ameriprise, Amerisafe, Apria, Asbury Automotive, Becton Dickinson, Boots & Coots, Buckeye Tech, Cal-Maine, CF Industries, CGI, Consolidated Graphics, IntegraMed, Kinetic Concepts, Methode Electronics, New Frontier Media, Nexstar, Novamerican Steel, O'Charleys, Quadramed, Sauer-Danfoss, Scholastic, S&P Depositary Receipts, TBSI, Twin Disc, Valspar and Warnaco, although positions may change at any time.

Richard Moore, CFA, has 40 years of experience in various facets of the investment business. He has been employed by banks, mutual funds and investment advisory organizations during his career and has also owned retail and service businesses. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Moore appreciates your feedback; click here to send him an email.